Mediocre employment growthThe BLS reported last week that a net total of 175,000 new jobs were created in May. That almost exactly matches the average of 172,000 new jobs that have been created monthly over the past year. In other words, May's job growth was about average by recent standards, though a little below average if you subtract the 12,000 jobs represented by downward revisions of previous months' employment estimates. Between tepid job growth and growth in the labor force, the unemployment rate was virtually unchanged in the latest report, at 7.6 percent.
Economic implicationsWhat does this job market information say about the economy? It places the economy in the same holding pattern it's been in for about four years now: growing, but not gaining any momentum. The soft job market is both a symptom and a cause of this problem. Employers lack the confidence in the economy to start hiring in big numbers. In turn, with people only slowly able to return to work, just a trickle of new wages are being introduced into the economy. The other element that has influenced interest rates is the Federal Reserve's monetary stimulus. The Fed has stated that it will continue measures to keep interest rates down until unemployment falls to 6.5 percent. With unemployment treading water at 7.6 percent, the Fed looks as though it will keep downward pressure on rates for the next several months.
A double standard for interest ratesAlong with mixed news on the economy, there has also been something of a double standard on how banks are setting their interest rates.
Mortgage rates were on the rise throughout May, suggesting that lenders saw enough improvement in the economy to expect higher interest rates in the future. At the same time though, CD, savings and money market rates remained unchanged.The explanation is that while banks and other mortgage lenders are anticipating an eventual upturn in economic activity, they don't necessarily see it happening right away. So, when it comes to making 15- and 30-year loans, they are eager to protect themselves by raising rates. However, when it comes to offering higher rates on short-term deposits, banks simply don't see the need to do so just yet. It will take more than a mediocre jobs report to push those deposit rates higher. In order for that to happen, monthly job growth will probably have to get to the 200,000 level -- and prove it can stay there.